Opera Limited (NASDAQ:OPRA) Second Quarter 2022 Earnings Conference Call August 30, 2022 8:00 a. m. m. ET
Participating companies
Matthew Wolfson – IR Manager
Lin Song – Co-CEO
Krystian Kolondra – Executive Vice President of Navigators
Frode Jacobsen – Chief Financial Officer
Conference Call Participants
Alicia Yap – Citigroup
Mark Argento – Lake Street
Lance Vitanza – Cowen
Operator
Welcome to Opera Limited’s 2022 quarter earnings call. Right now, all participants are in listen-only mode. After the speaker’s presentation, there will be a question-and-answer query [Operator Instructions]. Please note that today’s call is recorded [ Operator Instructions].
I would now like to speak with your speaker today, Matt Wolfson, director of investor relations. Please get started.
Matthew Wolfson
Thank you for being with us. As usual, I am accompanied today by co-CEO, Song Lin; and our Chief Financial Officer, Frode Jacobsen. In addition, our executive vice president of browsers, Kyristian Kolondra, who joined us to talk about our segmented technique for the browser market and how we thought about the GX browser and the gaming opportunity to be had for us.
Before I pass the floor to Song Lin, I would like to remind everyone that during today’s convention call, the Company will comment on the long-term effects and expectations, which are prospective within the meaning of Private Securities Litigation Reform. These are based on existing expectations and how we understand the existing economic environment, and are fully related to economic, competitive and other uncertainties and contingencies beyond management’s control. You should be warned that those s are not promises of long-term performance. You can check the safe harbor in the company’s press release for more details.
Our observation today will also come with non-IFRS monetary measures, adding adjusted EBITDA, which are other of our consolidated monetary statements that are ready to provide it in accordance with IFRS. We believe that the use of our non-IFRS monetary measures is an additional tool that investors can use to assess ongoing operating effects and trends. These measures do not deserve to be considered in isolation or as a replacement for the monetary data ready in accordance with IFRS.
We also publish Opera’s unaudited quarterly old monetary effects on our Investor Relations website. We’ll be live-tweeting the highlights of the call @InvestorOpera, so stay in touch during the call and into the future.
With that, let me skip the convention call to our co-CEO, Song Lin, who will cover our operational highlights and strategy, followed by Kyristian; and finally, Frode will talk about our finances and expectations for the future. Song?
lin song
Of course. Thank you, Matt. Es Song, and thank you all for being with us today. Once again, I am pleased to share with you our strong quarterly results. Like any business, we are affected by a more challenging economic environment, adding one in Europe, currency volatility and advertisers want to be more cautious, given the pressures on customer spending, however, Opera remains a small player in a mass market with plenty of room to grow.
Staying focused on our core expansion strategy has proven to be very effective and our functionality proves it once again. Our effects for the quarter were ahead, or even in the most sensible of our management ranks. Our record profit was driven by a healthy expansion in either our browsers and Opera News and our audience expansion, generating more revenue for Opera to monetize our advertiser relationships and functionality insights.
In terms of adjusted EBITDA, our record revenue, combined with lower-than-expected marketing spend, allowed us a margin of 21%, 5% above 16% and the most sensible in our target range.
For some time now, we’ve been talking about how we focus on improving the quality and price of our user base, investing in products and markets that allow us to monetize at higher rates. Compared to our existing user base at the time of quarter 2019 when we did not yet have COVID, and when the world was more stable, we increased our European resource by more than one hundred percent and our resource in the Americas by almost 70%.
Africa has had solid or slight growth, while we have reduced part of our user base in Asia, basically in South Asia, as we aim for a higher ARPU resource and a higher return on our investments. Therefore, our user base has declined overall. , our monetary functionality obviously justifies the accumulation of audience in Europe and the Americas. Because during the same period, our annualized ARPU of browsers and Opera News grew more than 80%, resulting in an expansion of more than 70% in the profits of our user base and that before contemplating our ad hoc audience extension. If you take a look at Opera’s overall search and advertising earnings, the combined expansion of our earnings over the past 3 years has been 105% and 27% CAGR.
A key detail of our strategy and we have already talked about it in the context of what motivates our product roadmap is segmentation. Identify how Opera can satisfy an express set of desires for express audiences that generic browsers in the general market, through their own nature. You can’t. This strategy also means that our products can be competitive and do so successfully, where we are talking about browsers optimized for bandwidth restrictions, the emerging market, mobile users or PC players in Europe and the United States. So, Kyristian how we translate this segmentation into an opportunity, soon.
Our strategy also has a positive ripple effect on monetization. Think of advertising, for example, in our traditional opera GX game browser. We know we have a very engaged audience. We know that our audience has a specific set of interests and we can succeed in that audience accurately, and we can also measure the effects without having to rely on cookies or the user’s unique identifier. It’s an inherently effective design that advertisers value. Our users also appreciate it because we offer them classified ads that they find very applicable and, in some cases, that would be for. For example, a merchant for an upcoming video game.
In addition, since our advertising is contextual advertising, we do not necessarily want to collect as much knowledge as possible from our users, which respects their strong preference for privacy.
Finally, our Opera Ads offering provides our functionality, advertisers’ access to a wider audience. This audience expansion allows the client to get not only our owned and operated sites, but also spouse inventories with strong functionality features. From a profitability point of view, since there are no related promotion or marketing costs, even on a limited scale, we already see here almost the same EBITDA margin as in the rest of our activities.
Opera is still in the early stages of executing our long-term advertising strategy; however, this quarter’s ad earnings continue to grow and account for 55% of our overall earnings and a 49% year-over-year expansion compared to the same quarter in 2021. .
Overall, our products and projects continue to show wonderful momentum and the browser has never been as applicable as it is today. We are driving successful expansion, close to a physically powerful customer web business that has an exceptionally strong track record for succeeding over the broader market that demands situations we face today. While the public market has been slow to give us credit for our profit and profitability expansion, for those listening today, I know I speak for each and every one at Opera, when I say, thank you for your confidence in our continued success. We work hard every day to capture our opportunities and continue Opera’s strong expansion.
So, with that, I’m going to move on to Kyristian, who is our executive vice president of browsers, our company’s core products. We wanted to take the opportunity to show a more detailed idea about how we handle the competitive landscape and in Specify some of the opportunities we see in GX browsers for gamers. So here I give the floor to Kyristian.
kristian kolondra
Since this is my first phone call, I will introduce myself by saying that I have a background in software engineering and product management, and that I have spent more than 15 years with the Opera team. I run our browser products. In general, the main hub is Wroclaw, Poland, a university town and a wonderful hub for skill, as well as some places in Sweden and, more recently, Scotland.
When we create our browsers, we don’t mimic or mimic the default formula settings installed through the big brain like Chrome and Safari, which some of our competitors have. You can see what happened to them. They have lost a significant percentage of the market, especially among the users with the highest added value in the geographical areas sought. And we have taken more than our fair share of this decline, which naturally makes us happy.
The very precept of being a browser of choice is to constitute a genuine choice. As Song Lin said, Opera is the browser of choice for other people who need to decide on their browser. So we do our best to be different. We lead with innovation and the ability of sales themes, which works quite well. This means selling our benefits and technological features, such as privacy and knowledge backup features or any other productivity features we have.
And we continue to do our best, so that other people who care enough to see a chosen browser decide on Opera. A few years ago, we made the decision to take it to the next point and drive our expansion by identifying segments. and then create browsers that work for other people, like GX for gamers. It was great luck and allowed us to generate a profit increase of almost 50% in a main browser market over the past 3 years to compare the same normalized base that Song Lin just mentioned.
Our core product renews our flagship browser, but thanks to intelligent architecture and technical work, we have been able to turn our technology base into building blocks that allow us to create and, more importantly, run our specialized browsers in a very undeniable and effective way. . way.
To summarize, we have a flagship browser that is a component of innovation that you can place elsewhere, with strong retention of user engagement, and in addition, we have developed a way to use it very cost-effectively as a foundation for any segment. browser that we would like to launch as we did with Opera GX.
In terms of what we had for Opera, I would highlight two spaces of interest. First of all, the creation of new versions of our browsers only starts with GX and our cryptographic browsers. We are already exploring other sub-segments of additional users, and our efforts will be detected and lead to additional adoption, especially in Western markets. We will announce those new segments and products in the future.
And the area of the moment, our existing gaming initiatives. Opera GX continues to exceed our expectations. We now have 14. 5 million desktop users, 2. 5 million mobile users, which translates to a 78% year-over-year user expansion for GX as a whole. Our gaming users also constitute our ARPU users with an ARPU of $2. 89, more than 3 times the average of our company.
Therefore, this product alone now generates a turnover of $50 million consistent with the year, a vital milestone of which we are very proud. As I indicated earlier, we continue our ability to monetize this highly specialized and highly engaged audience. We started enabling more [indistinguishable] inventories in GX, as we did in our flagship browser, necessarily expanding advertising and other non-search related gains in our gaming browser.
We are also working on the stake in the GX corner, which we plan to monetize. We’ll offer cutting-edge new features for our users, incredible personalization features, and expand a suite of offerings that will allow advertisers to engage more with our gaming audience. .
Just to emphasize, GX’s audience is very engaged and incredibly valuable. They are not casual players. They are hardcore gamers, playing for a few hours a day, buying gaming hardware, buying virtual currencies that look like almost every day. We are temporarily seeing them as one of the largest audiences of online gamers, and this very active user base allows us to integrate with other players in the segment to create an even larger gaming ecosystem.
But we also know that gaming is rarely the only highly engaged online audience, and we continue to invest in identifying new segments and developing products for those segments. In short, this is an exciting time for us. We are very excited. to move Opera forward, and I’m excited about our plans here. We will continue to create wonderful products, attract high-value users and drive profit growth.
I’ll pass the floor to Frode now, and then I’ll be there for the questions and answers at the end, in case you need to double-click on any of those topics. Frodé?
Frode Jacobsen
Thank you, Kyristian. As Song Lin pointed out, the quarterly business function was much higher than our expectations. Revenue reached a record $77. 8 million, representing a 29% year-over-year expansion and a forged excess of our previously reported direction of $71 million to $74 million. The lack of functionality was basically due to two factors, which were not included in our expectations. Revenue in Eastern Europe remained stronger than expected, and our ad generation platform performed very well.
Overall, while approximately 85% of our profits remain, the successful expansion of advertiser demand has grown faster and with higher margins than we had thought. Operating expenses basically benefited from relief in marketing expenses, some of this relief was similar to schedule. While Opera continues to enjoy a satisfactory and successful expansion, we are also taking additional precautions in our expansion investments in light of the broader economic environment.
Revenue charges represent 15% of revenue, as expected, and the payment includes an accrual in our bonus provisions given our track record to date. As a result, we generated adjusted EBITDA of $16. 6 million, well above our third-class diversity of $8 million to $12 million and representing a margin of 21%.
Next, let’s move on to our strategic investments, 2 old and 1 current. As you know, in the first part of the year, we sold our stakes in Nanobank and StarMaker, or STAR X. Our stake in Star X sold in April for $83. 5 million and we raised the first $28. 4 million of the quarter on a scheduled basis. . The remaining 2 letters expire at the end of 2023 and the end of 2024. Our stake in Nanobank was sold in March for $127. 1 million, payable in 8 quarterly installments of $15. 9 million each.
Today we announce that we and the client have agreed to make safe adjustments to the percentage movement agreement. The client recently raised certain allegations similar to the original agreement and requested the cancellation of the transaction. Although we discussed those allegations, we decided that an amicable settlement of the case under the new terms we summarized in our press release was impressive for the inherently insecure final results of the litigation. This agreement allows us to move forward and stay focused on our core business.
We earned the first installment of $8. 5 million and the global attention of all bills is greater than $4. 6 million to $131. 7 million to compensate for the long payment term.
Our third and final strategic investment, OPay, remains classified as held for sale. As a reminder, this is a 6. 4% stake in the company after we sold a 2. 6% stake for $50 million last year.
Transition to our $50 million buyback program. During the current quarter, we repurchased 1. 26 million ADSs for $6. 7 million, adding up to the 570,000 ADRs repurchased in the first quarter and the 600,000 ADSs to date in the third quarter and repurchased a total of 2. 43 million ADSs for $12. 7 million to date. notable actions to 113. 5 million ADS equivalent with more than $37 million in redemptions to be made.
Given the obvious disconnect between our company’s core price and its market price, we are pleased to have a smart advantage in our buyback program. As of June 30, we had 107. Sorry, we had $187 million in money and marketable securities. , up from $182 million on March 31. Our operating money was well below adjusted EBITDA this quarter, primarily because relief in marketing expenses in isolation resulted in $11 million relief in accounts payable and normalization of accounts receivable after receiving some anticipated invoices in the first quarter and earnings expansion in the current quarter.
Now let’s move on to our advice. Given the continued momentum of our business, we are raising our full-year earnings guidance from $313 million to $319 million, representing a 26% year-over-year expansion at the midpoint.
We are also extending the declining end of our adjusted EBITDA diversity from $53 million to $60 million for the year. This represents a margin of 18% at the midpoint and an EBITDA dollar accrual of 95% through 2021. For the third quarter, we expect revenue of $81 million to $83 million, representing a medium-term year-over-year expansion of 23% year-over-year and adjusted EBITDA of $14 million to $17 million. In the aspect of position that. . .
[Technical difficulty]
Matthew Wolfson
Hello, that’s Matthieu. I’ll move on later, I think it disconnected right there. On the cargo side, we expect higher marketing prices compared to the current quarter, and we expect the profit load to accrue through some percentage issues relative to earnings as our ad generation platform grows. We will be expecting some relief in labor prices and overall other items of charges deserve to be strong compared to the current quarter. In summary, we are very pleased with those effects on our strategic direction and hope that this call has been useful to you along with our press release.
I will then call back the operator to answer questions and please feel free to take credit for Kyristian’s presence today as he is not on those calls.
Q&A session
Operator
[Operator Instructions]. Our first will come from Alicia Yap of Citigroup. Your line is now open.
Alicia Yap
Hello thank you. Good evening, Management and thank you for answering my questions. Congratulations on the literally falsified results. I have two questions. The first is opposed to this inflationary environment and also to macroeconomic weakness, but has controlled the accumulation of revenues for the whole year and the EBITDA forecasts. Could you help us explain a little bit what motivates such a discrepancy?between the functionality of your company and the macro?Is it due to the weak base of last year?Or is it because the reopening industry component really started contributing to the increased demand for advertising?And you also wonder if there is a macro weakness that can simply potentially potentially your advertising business in the coming months?
Possibly I would have also read my query at the moment. So it is for Kyristian. Kyristian, welcome and thank you. I think when it comes to the gaming industry, I know you’ve talked a lot about the functionality of GX [Technical Difficulty]. But I only have a broader query. Was there a post-pandemic reopening trend that you can potentially see for your gaming business as well?And you’re also wondering about the slowdown you’re seeing in the gaming industry?Thank you.
Frode Jacobsen
Hello, Alicia, talk Frode. De back on the call after being disconnected. I can begin to answer your first question. I think we’ve looked at the overall economic environment and we remain cautious. We handle our business with caution. But at the same time, it’s almost when you’re a small player, the sum of the opportunities we see is almost. . . it’s helping us not necessarily want to stick to the total market. So I think that’s a key component of why we’re proceeding to do, necessarily what we did in the first quarter, which is also to grow above our expectations and continue to set expectations for quarters a little higher than what we initially saw.
kristian kolondra
And for GX for gaming, I can say that, in fact, we already noticed the end of distance learning, the end of lockdowns that, of course, replace the habit of gamers, not just gamers, of all online users because other people were no longer locked in their homes and so on. But I can only say that what we’re seeing is that we’re seeing continued growth, and we’re seeing that player models are more affected by the end or start of school than by the pandemic. So we don’t see for the players. They are usually young people of Generation Z, we don’t see any real effect here.
Alicia Yap
Good, good. Thanks a lot. Very useful.
Operator
Our next one will be Mark Argento of Lake Street. Su line is now open.
Marco Argento
Hi, hello, guys. Just a few quick questions. He discussed that he saw a reduction in marketing spending during the quarter. Can you dig a little deeper into that for us, in particular, juxtaposing that with the strong 31% expansion you’ve noticed in North America?
lin song
Yes. So that’s fine. So it’s Song Lin. I’m not sure, but at least ask about the color of the decline in marketing spending in the current quarter. So because I think it’s just a matter of, I think we’ve been smarter in identifying the right resource. And then also those who contribute more. So yes, it is. I think we’re pretty much on time for the current quarter, but the substitution is simply due to the fact that we’ve been smarter to get the right resource and at the right price.
Therefore, we have a superior return on investment. And we may have an even higher return on investment than expected. it is not so effective to end up with money, so we do not finish it. So it’s a matter of that.
Marc Argento
So that’s the kind of path. So, he’s saying he saw investment pull back at some point, but then the market changed, so it pulled back a bit. Is it your. . .
lin song
Yes. So yes, more likely to be exact. I think what happened just when we’re more like, say, for example, when you’re starting the summer, then you can calculate that in the next few months the return will be lower. And then, if it’s more like, yes, like. . . then ROI is rarely effective enough for us, so we don’t. But then, for example, give some other example of that, for example, in the third quarter, when we see that of course it’s coming back now and everyone is back with all the monetization activity now, of course, it makes sense for us to invest now. Because now it is, well, you’ve also noticed higher and narrower yields than we have. So it’s more. . . yes, it’s more like more calculations. We are deeper and smarter when it comes to getting users.
Marc Argento
Super. Thank you.
Operator
Our next one will come from Lance Vitanza with Cowen. Su line is now open.
Launch Vitanza
Hi, guys. Thank you for answering questions and congratulations on a very smart quarter. To be clear, I want to say that Opera definitely outperforms the overall market. And I guess you do this despite your exposure to Russia and Ukraine. So let me start there. . You said that, I think you said that in relation to your advice, part of the speed was that you saw less effect of this domain than you had anticipated.
Do we think that, in the same way, you feel that you have more clarity about the impact in the future?Or is it still as volatile as ever? Could we see this potentially reversed?Could you be too competitive in your forecasts for the current part of the year as far as this specific area is concerned?
Frode Jacobsen
Lance, thank you for that. Yes, last time in the context of the war in Europe, we indicated that we expected an overall headwind of around $4 million consistent with the quarter for us. So, we indicated some other kind of $12 million for the year as a whole. As mentioned, Eastern Europe has done more than we thought. So I think the headwind that we saw in the current quarter was about half, about $2 million, and that includes strengthening the U. S. dollar against other global currencies, where in the end we have revenue.
So, at this time, it turns out that the point of the second quarter continues in the middle of the moment. So, I mean, that’s an improvement on our $6 million revenue. But we remain cautious and also how we have been affected in our orientations because it is a very unpredictable situation.
Launch Vitanza
Of course. It is ok. So let me move on to the MAU gain. Great task there. I assume that my consultation is obviously good, I should not say obviously, but I cannot believe that we are going to expect it to increase by up to 46% year after year indefinitely. In the past, I don’t know, about 8 quarters, it turns out that the profit consistent with MAU has only increased, and it has increased from quarter to quarter, as well as year after year. year.
Or do we deserve — is it $0. 94 as the new benchmark and Q3 and Q4, if there are any, maybe they’re a little higher than that?I mean, how do they deserve us to think about those sequential trends from quarter to quarter over the rest?of the year?
Frode Jacobsen
So maybe I can start from a numbers standpoint. But Kyristian, don’t hesitate to intervene. I think we’ve noticed a very strong expansion in the ARPU. If we look at the year after, that is, the quarter of the following year, it is due to the expansion of the comparable ARPU and the geographical composition of our user base, orienting it more to the west, our evolved markets. Therefore, the timing in the geographic mix is about twice as large as the similar expansion of ARPU, but either works very well.
When, and the observation, the last observation that needs to be made is when we concentrate our user base in emerging markets on the maximum number of monetizable users, then it has the effect of reducing overall usage in some of those countries, but an accumulation in revenue. This means that the resulting ARPU expansion naturally becomes very strong. But we think it’s a validation of the strategy we’ve followed.
Launch Vitanza
It is ok. Let’s then move on to the type of capital allocation consultation. I mean, it’s hard to believe that the functionality of the company would be better and yet the functionality of the actions, as you yourself pointed out, has been notoriously disappointing. So why wouldn’t he?I mean, it’s wonderful that he brought in a few million ADS. But, and I guess the answer is that it’s limited by the underlying trading volume of the stocks.
If so, you can check that out for me. But if that’s the case, what’s the procedure for the idea around something more ambitious like a Dutch tender, where you probably wouldn’t have to worry about where volume wouldn’t be what you’re looking for?are you in the purchase you have launched?
Frode Jacobsen
So, number one, I can verify that the effective limiter under which we operate the buyback program is giant maximum limits and a kind of average daily volume percentage, etc. In terms of the broader mind of what we can do, yes, we have a very strong balance sheet and it’s becoming more potent over time with our operating effects as well as the assets we’ve had and sold. . But we have not made any resolution on anything. We, if that happens, will be sure to announce it clearly.
Launch Vitanza
It is ok. Thanks guys.
Operator
[Operator Instructions]. It turns out we don’t have any additional questions at this time. I will now pass the program to Song Lin for any additional or final comments.
End of questions and answers
lin song
Yes, I am Song Lin, here. So yes, I mean, thank you for joining us. It was a wonderful quarter. And we feel smart about proposing our content a lot and getting very solid commercial projects aligned to even contribute to our growth. Therefore, our strength in our activities and in our balance sheet allows us to pursue our opportunities and even in a challenging operating environment. Therefore, we appreciate your time and look forward to talking to you in the future.
Operator
Ladies and gentlemen, this concludes today’s event. You can now log out.